Lil Miller-Fox had heard about a less cumbersome way to invest her
retirement savings into a house or other rental property. But the
co-founder of a popular web site that helps people identify future
retirement property never knew of anyone who actually did so.
The reason, she would come to discover, is that only a very small
percentage of people with Individual Retirement Accounts – “I heard 2
percent,” said Miller-Fox – are actually using what’s known as
“checkbook IRAs” to take total control of their retirement funds.
But the Vero Beach, Fla., resident, who operates www.PrivateCommunities.com,
a site which aggregates information about many of the country’s finest
master-planned communities, went one step further: She set up a self-directed
checkbook IRA to purchase an investment home at Collier
Club, a privately-developed gated community in Sebastian, Fla. And
then her husband did the same thing with his retirement savings at
another property in the same community.
“Very few people know about this,” says Miller-Fox. “But it is a great
way for someone like me to manage my retirement funds. I feel much more
comfortable investing in tangible real estate than stocks and that sort
Actually, not a lot of people even realize they can invest their
retirement money in a rental house. But you can. It’s a great technique
for anyone who wants to move into a thriving community when they retire
down the road to purchase that property now, while prices are low and
mortgage rates are even lower.
408 of the Internal Revenue Code, as long as you don’t benefit
directly, you are permitted to put into real estate some or all of the
funds you have set aside in a tax-sheltered IRA or other simplified
employee pension. In fact, the only restrictions imposed by the Internal
Revenue Service involved certain limitations on gold and collectibles.
These are called self-directed IRAs because you are allowed to move your
funds around. But until a 1996 court case, every step you wanted to make
had to be made through a costly custodian. In other words, you choose
the investment and the custodian carries out the transaction.
But 17 years ago, in a landmark ruling in Swanson v Commissioner, the
court essentially created a new type of self-directed IRA structure –
the checkbook IRA – that is much simpler than investing in a regular
self-directed IRA custodial account.
Under the new structure, an IRA is set up as self-directed account
that’s capitalized by funds rolled over from your current retirement
account. Then, a limited liability company is created in which your new
IRA purchases the membership units. Now your money is held in an LLC and
you are ready to invest at your discretion.
You can buy, sell and manage domestic, foreign, commercial, residential
and rental properties, with the profits growing tax-deferred in your
retirement account. Your funds are held in a normal business bank
account, and as its manager, you can sign contracts and write checks on
the LLC’s behalf, just like any other business.
The speed at which you can move opens up a slew of investment choices,
such as snapping up foreclosures or tax liens – or even a house in a
prime spot on the ocean or in the mountains.
There are still restrictions. You can’t use the property as your own
residence or vacation home – and in this case, you means anyone in your
family. And you can’t take money out of the account without incurring a
big tax penalty. But you can sell a house and purchase another one, or
buy more than one property at a time.
There are still fees, too. There’s a charge to set up the LLC, and you
still must have a custodian. But because you are running the show, and
the fees are much less than with a regular self-directed IRA.
“I purchased a home for cash just to see how this worked,” says
Miller-Fox “It worked great. It’s not complicated at all. I’ve had the
property rented and the rent is deposited into my checkbook IRA each
month. And I pay all the bills from there. I’m in full control.”
The vacation and second home expert really likes the way she can invest
in a business she understands – “I don’t know what I’m doing with stocks
and bonds,” she admits – and thinks more people would invest as she did
if they knew or understood checkbook IRAs.
“It’s a great way for people to finance their retirement homes long
before they are ready to use them,” says Miller-Fox.